Huaren Pharmaceutical Co., Ltd. (SZSE:300110) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

After such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may consider Huaren Pharmaceutical as an attractive investment with its 17.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Huaren Pharmaceutical certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Huaren Pharmaceutical's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Huaren Pharmaceutical's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. Pleasingly, EPS has also lifted 172% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's about the same on an annualised basis.

In light of this, it's peculiar that Huaren Pharmaceutical's P/E sits below the majority of other companies. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Bottom Line On Huaren Pharmaceutical's P/E

The softening of Huaren Pharmaceutical's shares means its P/E is now sitting at a pretty low level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Huaren Pharmaceutical currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

Before you take the next step, you should know about the 3 warning signs for Huaren Pharmaceutical that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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